Grubhub Rival Waitr to Go Public through Merger with Landcadia Holdings
For investors in online food delivery, it’s tempting to feel late to the party. But for those who do a little extra digging, there is still a chance for a real bargain.
Meet Waitr, an online food delivery company that pairs up with full-service restaurants to offer customers a streamlined dine-at-home experience using their smartphones or computers. The company was among the first to employ its own delivery staff focuses on underserved markets with populations of 50,000 to 750,000.
Waitr plans to list on Nasdaq later this year after it is acquired by Landcadia Holdings (ticker: LCA), a blank-check company or SPAC that raised money to find a target. The deal has been approved by both boards and the key hurdle is getting the majority of LCA shareholders who cast votes to approve the deal.
A key attraction of Waitr is that it’s fairly priced – for now. Investors who buy LCA stock now are effectively paying the value of the $250 million in cash the company raised, or about $10 a share. Shares of larger rival Grubhub, meanwhile, have risen 158% in the last 12 months.
In terms of valuation, Waitr looks like a far better deal than Grubhub. Indeed, if the deal goes through, investors in LCA would own Waitr at an enterprise value, adjusted for cash, of $388 million. That’s a multiple of 6.0 to 6.5 times 2018 sales projections and 3.0 to 3.2 times 2019 sales projections. By contrast, Grubhub trades on multiples of 12.3 times consensus 2018 estimates and 9.6 times 2019 estimates.
What’s more, Waitr is growing much faster than Grubub. Waitr forecasts revenue growth of 125% in 2018 and 90% in 2019, versus consensus estimates for Grubhub of 44% and 28% over the same time periods.
A key component of Waitr’s strategy is to enter markets where there is essentially no competition. The company, which expects to be in 45 markets by year end, sees another 200 potential markets in the southeast region where it focuses. That suggests it has at least a few more years of growth without encountering significant competition.
Even when competition inevitably shows up, Waitr holds its own. The company averages more than 40% of third-party delivery sales in the markets where it operates versus less than 25% for the closest competitor, according to Waitr’s investor presentation.
Why? Waitr charges restaurants a lower percentage fee on each order than virtually any other online delivery service. That fee percentage, known as a take rate, is just 15% for Waitr restaurant partners. Grubhub, by comparison, had a 19.6% take rate in the second quarter. Some others charge even higher take rates.
Such a pricing differential can be a dealbreaker for many restaurants, which often have razor-thin margins. That’s especially true among some mom and pop businesses in the smaller markets where Waitr operates. Katie Norris, Grubhub’s media relations contact, did not reply to several emails from IPO Edge seeking a comment.
In fact, many restaurants remain ambivalent about the benefits of online delivery. In its second-quarter earnings call, Red Robin said it was unclear how much an increase in delivery actually helped the business. The worry is that diners who would have otherwise come to the restaurant simply ordered online instead. When that happens, the company loses high-margin dine-in business in exchange for low-margin delivery business.
How does Waitr manage to charge a lower take rate? After all, it earns a healthy gross margin of 30%.
One reason is that Waitr has a structural cost advantage over many rivals. The company hires drivers as employees rather than contractors, which allows it to take advantage of certain laws around minimum wages. In many cases, the company pays drivers just $5 per hour – less than the federal minimum wage – and lets them supplement their income with tips. And while employees must be offered certain benefits like health insurance, many drivers are either elderly or students who already have such plans in place.
By contrast, operators like Grubhub tend to employ contractors. Often, it is considerably more expensive to pay contractors on a by-the-order basis. As a result, Grubhub and others may have less flexibility on take rates.
Could big restaurant chains decide to handle online delivery on their own? It looks unlikely, given the cost of operating a delivery service in a town where even a mega-chain has only a few restaurants. Brinker International, for instance, has focused on partnering with third-party players. The company’s Maggiano’s Italian restaurants offer some delivery through DoorDash, an independent app-based service.
Also, there are significant upfront costs to consider for restaurants that create an in-house delivery service. But Waitr only charges an upfront fee of $1500 to join. Once aboard the Waitr platform, restaurants can recoup that investment in a few weeks or less.
If the deal between LCA and Waitr closes, investors will also get another big boost from billionaire restauranteur Tilman Fertitta, owner of restaurant chain Landry’s, Golden Nugget, and the Houston Rockets basketball team. Mr. Fertitta will join as a board director and give Waitr entrée into new markets where his businesses operate. Landry’s and Golden Nugget have over 4 million loyalty members while the Houston Rockets have over 10 million Facebook followers.
Looking to the future, there is a good chance that online delivery companies will consolidate. China, whose delivery industry is arguably in a more advanced stage, has already witnessed consolidation.
That could mean opportunity for Waitr, which will have $141 million in cash on its balance sheet if the LCA deal closes. While it will deploy some of that money to accelerate organic growth, the company has demonstrated it can bootstrap, having raised only $26 million in funding to date. So if M&A opportunities arise, Waitr should be ready to pounce.
A risk for LCA investors is that the deal isn’t approved, in which case they’ll simply get $10 a share returned to them. But if it is, there are compelling reasons to expect the stock to surge. With limited downside, investors who make their orders now may be in for a treat.
John Jannarone, Editor-in-Chief